Horizon Air’s President on Future Growth and Outsourcing (Across the Aisle Interview)

And we’re back. Today, I pick up my interview with Horizon Air President Glenn Johnson by talking about future growth and Alaska’s recent decision to outsource some flying to SkyWest. [Read Part 1 of the interview]

Cranky: Looking at Horizon now compared to a couple years ago, you look a lot more like any other regional carrier other than the fact that you’re owned by Alaska Air Group. Is this foreshadowing a possibility of doing flying for other airlines?

Glenn: Yeah, I wouldn’t rule that out. Right now our focus is on getting our transition to the all-Q400 fleet and getting our profitability to the level of Alaska’s. You know, Alaska has just achieved its 10 percent goal for return on invested capital, and that’s the goal for Horizon as well. We’re halfway there. When we get to that level, I think we would be competitive in terms of being able to go out and look for other business if that was in the interest of [Alaska] Air Group to have us do that.

Cranky: And you don’t have many competitors flying Q400s.

Glenn: And I think the Q400 is a great airplane in the right markets. Obviously it doesn’t compete on real long haul markets. With the number of seats it has and the incredible fuel efficiency, it’s a fabulous competitive tool for us.

Cranky: Looking at the Alaska network, there’s really limited growth opportunity for that airplane. You’ve talked about going into the State of Alaska, but other than that, do you see real growth opportunity with Alaska’s network?

Glenn: We’ve actually just recently introduced service from San Jose to Los Angeles. It’s an interesting one for us to watch because it’s an intra-California marketplace … obviously a competitive marketplace but also pretty well-suited from my perspective for the Q400 so I think there’s lots of opportunities once we get the cost structure right at the company.

Cranky: That market is interesting as well because you’re going up against one of your codeshare partners too. I was waiting to see if we’d see some American regional jets disappear in favor of the Q400 at some point.

[silence]

Cranky: Probably not gonna comment on that, I guess. [laughs]

Glenn: [laughs] Nope. I’ll leave that one alone.

Cranky: What about the Alaska flying? Are you talking about that at all yet?

Glenn: We haven’t announced anything other than what we’ve said on the [earnings] call which is that we are actively looking to see if the Q400 has a place doing State of Alaska flying from a technical standpoint and from a community standpoint as well. If you think about the State of Alaska flying, and my last job was as the CFO for [Alaska] Air Group so I have some insight into this, we need to figure out the right mix of flying where we can still handle the right mix of cargo and passengers. At the end of the day, the Q400 on the right stage length has better economics than a 737. That can allow us to provide service more efficiently and produce lower fares. That’s what customers want these days.

Cranky: Are there are any tech issues with the Q400 up there?

Glenn: It kind of depends on which cities and that’s why we’re looking across the whole range. Alaska pioneered the [Head-up Guidance] system and we have that, so as far as low visibility flying we’re fine. And Alaska pioneered [Required Navigation Performance] RNP flying, particularly for the Juneau Airport which is quite tricky. Horizon has work to do to get to the same level of RNP certification at each airport. That’s what I mean when I talk about technical issues.

Cranky: Switching gears, as a Long Beach resident I was wondering how you would continue to serve Long Beach when the CRJ-700s are retired. I see there’s an agreement with SkyWest to take some of your CRJ-700s. I imagine that’s making some people nervous at Horizon.

Glenn: We haven’t talked about specific city pairs but all along as we’ve talked about simplifying down to a single fleet type with Q400 flying, there are some markets that we are serving on behalf of Alaska on the CRJ that are not great candidates for a Q400. You could probably technically do Pacific Northwest to Southern California routes with a Q400 but it adds 20 to 25 minutes time and so that’s probably not ideal. Alaska is still working on specifics on which markets. It’s just 5 airplanes.

And you’re right, the Horizon employees are concerned about the impact of that and my reminder to the employee group is that we’re very competitive with the Q400. We’ll become even more competitive when we get through the rest of the business transformation process – getting to a single fleet type, getting the rest of the reliability and cost issues with the Q400 taken care of. At the end of the day I think the Q400 becomes a competitive advantage for us in the right size market against anybody else.

Cranky: I assume there is some anxiety around which routes will be taken over, but I’m sure they’re nervous saying, “can this grow any further? Will it take routes away from us?”

Glenn: The best way to not have that happen is for us to have really competitive costs so we can produce seats for Alaska at the best costs possible within the family.

Cranky: Is there any discussion about Alaska Air Group spinning off Horizon into a separate company? Sell it to a larger regional?

Glenn: We’ve said that no, we acquired Horizon (I say “we” because I was at [Alaska] Air Group) with the intent of having that feed owned within the Air Group. Horizon has an important place within [Alaska] Air Group. The challenge for Horizon until recently has been they were producing all that feed but not generating adequate return on the $750m of capital on the Horizon side of the business – about 25% of total capital of [Alaska] Air Group. The board was rightly concerned; we certainly couldn’t invest more capital in the Horizon side of the business with no return on it, and even with the existing capital, we had to get it to generate an adequate return.

For the year 2009, we generated 5% return on invested capital at Horizon and 11.2% for Alaska so Horizon is moving along. We were in the 1 to 2% prior to that in terms of return on invested capital on the Horizon side. We’re moving pretty swiftly ahead. We just have to keep focus on that and we can get to 10% return and then we can look at additional investments for Horizon. But absolutely the stated intent is to keep Horizon within the Air Group and have it be an important feed provider for Alaska.

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